Starting a business is tough. And it is made much tougher by not having the money you need to get things done. Many startups fail in just their first few years because they fail to secure funding or a startup business loan and end up running out of cash. Often, it is best for entrepreneurs to raise money from investors or to take out a startup business loan early on, perhaps even before the company is operating, and give themselves enough financing runway to survive until they can safely start generating revenue. In cases like this, it is critical for startup founders to properly plan and account for all their upcoming expenses. Doing so requires time and effort, and it is not easy. But don’t worry, we’re here to help! Here are some things you can do to help figure out how much money you should take out on your startup business loan.
How Much Money Does My Startup Need?
Before you start thinking about things like what kind of startup business loan you should be applied for or if you need to bring on investors, you need to determine what are your primary expenses, and how long it is going to take for your company to start generating revenue.
The specific nature of your business’s early expenses depends significantly on its industry. However, it is worth noting that most small businesses need only less than $100,000. As far as getting a startup business loan, this is a good thing as applying for less money can increase your chances of approval. On the flip side, you do not want to apply for less money than you need to get going. Some startup business owners make that mistake: They think that some money is better than no money and so they accept whatever they qualify for. But this is not necessarily the case. You must apply for the amount your company actually needs to be successful.
There are some industries like manufacturing and certain sectors of technology that require larger startup business loans. These can be acquired; however, it is important to be realistic. In order to get a large startup business loan, you will need good credit and or a history of business success.
Some of the expenses you might want to consider when calculating your startup business loan include:
●Incorporation Fees: To apply for a startup business loan, your business will already need to be incorporated, so incorporation fees are something you are actually going to need to pay for out of your own pocket. Thankfully, they are only a few hundred dollars (usually $300) or less. You can hire services or a lawyer to help you out with the basic incorporation documents upfront, and then if your company needs extended legal work you can ask your lawyer for an estimate and add those costs into the total amount of your startup business loan.
●Equipment: Equipment is a bigger expense for some startup businesses than others. For example, if your company is in the manufacturing sector, you will likely need some expensive heavy equipment. In cases such as these, where equipment makes up a large portion of your total costs, you may consider equipment financing. Financing your equipment is a great way to get your startup going and it does not require as much credit as other types of financing. The thing to keep in mind with equipment financing, though, is that it is to be used only on equipment and machinery—this type of funding is not flexible.
●Website: Again, depending on your industry, your company’s website can be either a major or minor expense. If you are selling things online, or if your startup has an important e-commerce element, it will be important that your website looks good and runs well. An attractive, easy-to-use website is your business’s digital storefront, and if can either help or hurt you. All of this is not to say that you necessarily need to spend thousands of dollars building out an elaborate website from day 1. Keep things simple in the beginning, and you can even explore do-it-yourself options online like popular website-building and management platforms. If you do not have time for these platforms or lack the digital know-how, hire help!
●Marketing: Most startup businesses find it best to wait on spending lots of money on marketing. To spend money on advertising and or marketing before your business is operating properly or before you have nailed down your first product or service is putting that “cart before the horse.” With that said, there are some businesses that will benefit from early marketing efforts. These can include service startups as well as retail spaces and others.
●Payroll: If you are hiring employees to help with your startup you should account for your startup costs to range between 20-25% of your total budget. The success or failure of your startup is very much depended on the skills of its people, so it is important to hire talented employees. In the beginning, though, it may be difficult to offer prospects as much money as they may be able to get elsewhere. In cases such as those, it is worth discussing alternative payment methods with new employees, including future benefits or, perhaps, even something like payment in the form of sweat equity.
●Office Space: If your business does not need office space, in the beginning, you should hold off on it as it’s a major expense that can range from $100-$1,000 per employee, per month. But there are some businesses that need storefronts, and in those cases, you should include the costs of office space in your startup business loan.
●Office Furniture: Office furniture is a large expense that many startup business owners fail to calculate for. A good estimate is that office furniture should cost you anywhere between 5% and 10% of your startup business loan.
●Insurance: Employee insurance can cost more than $1,000 per employee per year. If you want a more accurate quote for your specific company prior to applying for your startup business loan, it is worth speaking to an insurance agent.
There you have it, some of the main expenses you need to remember when going for a startup business loan. Remember, in the beginning, it is important to be conservative both with your spending and with how long you calculate it will take your startup to start generating revenue.